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Jumbo, conforming rates are now competitive

Banks given greater incentive to originate jumbos

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Jumbo mortgages are becoming more competitive in their pricing when compared to conforming loans, disrupting a historic trend.

In fact, there have been several instances where originators have priced their jumbo, nonconforming 30-year, fixed mortgages lower than the conforming rates being advertised, Compass Point Research & Trading analysts Kevin Barker, Isaac Boltansky and Jason Stewart said.

"We have also seen a pickup in the jumbo securitization market," Compass Point analysts noted. "Over the last three quarters, an increasing amount of jumbo securitizations have come to the market from a diversifying base of sellers."

Recently, PennyMac Investment Trust (PMT) came to market with its first nonagency securitization, while Redwood Trust (RWT) has completed 11 separate transactions and EverBank recently started securitizing jumbo loans for the first time.

The opening of this market should give banks greater incentive to make these loans, Compass Point noted.

There is continued speculation that the FHFA will announce a decrease in the maximum allowable loan amounts accepted by both government-sponsored enterprises soon, which could take effect next year.

Currently, the national conforming loan limit is $417,000 with the higher threshold for more expensive markets set at $625,000.

Several proposals have been offered, including a drop in the current limit or the removal of high costs GSE loan limits altogether.

"Our sense is that rate differentials will continue to incentivize borrowers to stay below the conforming limit when possible in order to take advantage of a lower mortgage rates," Compass Point analysts said.

They added, "However, we would note, jumbo rates have become more competitive with conforming rates given the recent rise in interest rates, the large amount of excess liquidity for banks and the increase in guarantee fees on conforming loans."

Congress has altered the GSE and Federal Housing Administration loan limits numerous times in recent years as a way to support the ongoing housing recovery.

The floor and ceiling thresholds for both entities are based off the national conforming loan level, which is set by the FHFA.

Point being, the FHFA’s decision regarding the national conforming loan limits impacts both the GSEs and the FHA, Compass Point noted.

Going forward, all eyes are on the FHFA as it is expected to announce its 2014 loan limit decision in the coming weeks.

Depending on the FHFA’s decision, there could be significant market push back and Congressional attention, which will ultimately be determined by the FHFA’s decision.

"The FHFA has generally taken measured steps when reducing GSE exposure, which leads us to believe that it will once again do so in regards to the loan limit," the Compass Point analysts noted.

They concluded, "Given the already condensed Congressional calendar it would take a drastic reduction or alteration in the loan limit to instigate Congressional action."

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